Commissioner of Internal Revenue v. La Campana Fabrica De Tabacos, Inc.

SPECIAL FORMER FIFTH DIVISION [CA-G.R. SP No. 40773. September 28, 2000.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . LA CAMPANA FABRICA DE TABACOS, INC. , respondent . D E C I S I O N CALLEJO , SR . , J p : This is a " Petition for Review " of the Decision, dated August 31, 1995, of the Court of Tax Appeals, in C.T.A. Case No. 4516, entitled " La Campana Fabrica de Tabacos, Inc. versus Commissioner of Internal Revenue, " cancelling the assessment for deficiency specific tax in the amount of P2,785,338.75 issued against herein Respondent on its purchase of stemmed leaf tobacco covering the period from January 1, 1986 to June 30, 1989; and from the Resolution dated May 7, 1996 denying Respondent's motion for reconsideration of the decision. AEcTaS The Petition at bench stemmed from the following factual backdrop Respondent is a domestic corporation engaged in, among others, the importation and local purchase of stemmed leaf tobacco, which it uses as raw material in the production and manufacture of cigar and cigarettes. On January 4, 1990, Respondent received Petitioner a letter, dated December 18, 1989, demanding payment of P2,785,338.75 representing deficiency excise tax, exclusive of surcharge and interest, on Respondent's purchases of stemmed leaf tobacco covering the period from January 1, 1986 to June 30, 1989. The demand letter was essentially based on Sec. 141 (b) of the National Internal Revenue Code of 1977 on the basis of the Bureau of Internal Revenue's interpretation that: "Sec. 141 of the Code provides that there should be collected a tax of P0.75 on each kilogram of the following products of tobacco; 'b) Tobacco prepared or partially prepared with or without the use of any machine or instrument or without being pressed or sweetened.' Stemmed-leaf tobacco is partially-prepared tobacco as provided under Section 1(L) of Revenue Regulations No. 17-67. Further, under the penultimate paragraph of the same section, it provides that fine-cut shorts and refuse scraps, clipping, stems and sweepings of tobacco resulting from handling and stripping of whose leaf tobacco may be transferred, disposed of, or otherwise sold, without the prepayment of the specific tax when the same are to be used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product. It will be noted from the above enumeration, however, that stemmed leaf tobacco is not among the products exempted from the payment of tax." ( idem, supra , emphasis supplied.) On January 12, 1990, Respondent wrote Petitioner a letter protesting the aforementioned deficiency assessment and requesting the reconsideration and withdrawal of said assessment. In the same letter, Respondent stressed that the BIR assessment was based solely on Section 141 (b) of the NIRC without, however, applying Section 137 thereof, the more specific provision, which expressly allows the sale of stemmed leaf tobacco as raw material by one manufacturer directly to another without payment of the (excise) tax considering that Respondent purchased stemmed leaf tobacco from manufacturers. Additionally, Respondent made reference to a BIR Ruling dated December 12, 1972, wherein the BIR expressly ruled that, under Section 137 of the NIRC, the sale of partially manufactured tobacco from a wholesale leaf tobacco dealer (L-3R) to a manufacturer of tobacco products (L-7) "for use in the manufacture of cigar and cigarettes may also be allowed without prepayment of the tax." On November 26, 1990. Respondent received a letter from Petitioner dated August 31, 1990 denying Respondent's protest on the grounds, inter alia , that: ITCHSa "In support of your contention, you cited BIR Ruling dated 12 December 1972 wherein it was held that '. . . The subsequent sale or transfer by the L-6/L-3R permittee of the redried or reprocessed product to another L-6 permittee for export or to an L-7 for use in the manufacture of cigars or cigarettes may also be allowed without the prepayment of the specific tax. Clearly, from the aforequoted ruling, the transfer or sale of partially manufactured tobacco, as a rule, is subject to specific tax unless there is an express grant of exemption from the payment of tax. The taxpayers up to this point in time have not presented any authority issued by the BIR granting them exemption." (Emphasis supplied.) On November 26, 1990, Respondent likewise received another letter from the Petitioner dated October 17, 1990 denying Respondent's protest with finality, and reiterating the demand to pay the amount of P2,785,338.75, representing deficiency specific tax, exclusive of increments, computed, as follows, to wit: STEMMED LEAF TOBACCO RATE OF TAX SPECIFIC TAX Local 3,713,785 kls. x 0.75 P2,785,338.75 On December 6, 1990, Respondent filed with the Court of Tax Appeals a " Petition for Review " seeking for the annulment of the deficiency assessment. On August 31, 1995, the Tax Court a quo rendered its Decision, the decretal portion of which reads, to wit: "WHEREFORE, in all the foregoing, the assessment of alleged deficiency specific tax in the amount of P2,785,338.75 issued by the Respondent is hereby CANCELLED for lack of merit. SO ORDERED." ( at page 83, Rollo ) On September 22, 1995, Respondent filed a Motion for Reconsideration of the aforesaid Decision, but the same was denied in a Resolution of the Tax Court a quo , dated May 7, 1996. On June 10, 1996, Petitioner instituted the present recourse, alleging as grounds therefor the following: "I. THE ASSESSMENT COVERS ONLY LOCAL PURCHASE OF STEMMED LEAF TOBACCO. II. UNDER SECTION 141(b) OF THE TAX CODE STEMMED LEAF TOBACCO, BEING PARTIALLY PREPARED OR MANUFACTURED TOBACCO, IS SUBJECT TO SPECIFIC TAX. III. THE STEMMED LEAF TOBACCO PURCHASED BY RESPONDENT IS NOT EXEMPT FROM SPECIFIC TAX SINCE THE SALE THEREOF WAS NOT MADE UNDER THE CONDITIONS PRESCRIBED IN THE REGULATIONS OF THE DEPARTMENT OF FINANCE. IV. CONSTRUING TOGETHER SECTIONS 141 AND 137 OF THE TAX CODE, STEMMED LEAF TOBACCO IS SUBJECT TO SPECIFIC TAX, EXCEPT WHEN SOLD IN BULK AS RAW MATERIAL FROM ONE L-7 DIRECTLY TO ANOTHER L-7. V. UNDER SECTION 43 OF REVENUE REGULATIONS NO. 17-67, THE EXEMPTION FROM SPECIFIC TAX OF PARTIALLY MANUFACTURED TOBACCO APPLIES ONLY TO PARTIALLY MANUFACTURED TOBACCO FOR EXPORT. VI. TAX EXEMPTIONS ARE CONSTRUED STRICTLY AGAINST THE TAXPAYER AND LIBERALLY IN FAVOR OF THE GOVERNMENT. VII. UNDER SECTION 127 OF THE TAX CODE, IF DOMESTIC PRODUCTS ARE REMOVED FROM THE PLACE OF PRODUCTION WITHOUT THE PAYMENT OF EXCISE TAX, IT IS NOT REQUIRED THAT THE TAX BE COLLECTED FIRST FROM THE MANUFACTURER OR PRODUCED BEFORE THE POSSESSOR THEREOF SHALL BE LIABLE. VIII. THE GOVERNMENT IS NOT ESTOPPED FROM COLLECTING LEGITIMATE TAXES DUE TO THE MISTAKE OF ITS AGENTS." ( at pages 16-17, Rollo .) On July 22, 1996, this Court rendered judgment giving due course to the Petition, from which Respondent filed its " Motion for Reconsideration ", on August 13, 1996, asseverating in the main that it was denied due process not having been granted the opportunity to file its " Comment " to the Petition. Acting on the foregoing Motion, this Court, on April 28, 2000, issued a " Resolution, " setting aside its July 22, 1996 Decision and deemed the " Motion for Reconsideration, " filed by the Respondent, as its Comment on the Petition, and Petitioner's Comment to Respondent's " Motion for Reconsideration " as Petitioner's Reply to Respondent's Comment. The parties were forewith required to file their respective " Memorandum " in support of their respective stance anent the Petition for Review within fifteen (15) days from notice thereof. DcSACE The Petition and the ensuing incidents are now submitted for the resolution of this Court. After a minutuose consideration of the respective assertions articulated on by both parties, We resolved to reconsider the July 22, 1966 Decision, and accordingly, deny due course to and dismiss the Petition. Hence, on the core issue as to whether Respondent is liable for the amount of P2,785,338.75, as deficiency specific tax on its local purchase of stemmed leaf tobacco covering the period from January 1, 1986 to June 30, 1989, We find and so declare that the Respondent is not. The resolution of the threshold issue is anchored on and resolved around the correct interpretation and complementary interplay of the following pertinent statutory provisions and administrative enactments cited by both parties: (a) Section 141 (now Section 144) of the National Internal Revenue Code of 1977 (hereinafter referred to as the Tax Code, for brevity), to wit: "SECTION 141. Tobacco Product . There shall be collected as tax of seventy-five centavos on each kilogram of the following products of tobacco: a) Tobacco twisted by hand or reduced into a condition to be consumed in any manner other than ordinary more of drying and curing; b) Tobacco prepared or partially prepared with or without the use of machine or instruments or without being pressed or sweetened; and c) Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco. Fine-cut shorts and refuse, scraps, clippings, cuttings, stems and sweepings of tobacco resulting from the handling or stripping of whole leaf tobacco may be transferred, disposed of, or otherwise sold, without prepayment of specific tax herein provided for under such conditions as may be prescribed in the regulations promulgated by the Secretary of Finance upon recommendation of the Commissioner if the same are to be exported or to be used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product . On tobacco specially prepared for chewing so as to be unsuitable for use in any other manner, on each kilogram, sixty centavos." ( Emphasis supplied .) (b) Section 137 of the Tax Code, to wit: "SECTION 137. Removal of Tobacco products without prepayment of tax . Products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use, under such conditions as may be prescribed in the regulations of the Department of Finance. Stemmed leaf tobacco, fine cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, stems or midribs, and sweepings of tobacco may be sold in bulk as raw material by one manufacturer directly to another, without payment of the tax under such conditions as may be prescribed in the regulations of the Department of Finance. TSDHCc "Stemmed leaf tobacco," as herein used means leaf tobacco which has had the stem or midrib removed. The term does not include broken leaf tobacco." ( Emphasis supplied .) (c) Section 2(m)(1) of BIR Revenue Regulations No. 17-67 [Tobacco Revenue Regulations on leaf, scrap, other partially manufactured tobacco and other tobacco products; grading, classification, inspection, shipments, exportation, importation and the manufacturers thereof under the provisions of Act No. 2613, as amended], to wit: "Section 2. Definition of terms . xxx xxx xxx (m) " Partially manufactured tobacco " includes: (1) "Stemmed leaf" handstripped tobacco, clean, good, partially broken leaf only, free from mold and dust." (d) Section 20(a) of Revenue Regulations No. V-39 [The Tobacco Products Regulations], as amended, to wit: "Section 20. Exemption from tax of tobacco products intended for agricultural or industrial purposes . (a) Sale of stemmed leaf tobacco, etc. by one factory to another . Subject to the limitations herein established, products of tobacco entirely unfit for chewing or smoking may be removed free of tax for agricultural or industrial use; and stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, refuse, scraps, cuttings, clippings, and sweepings of tobacco may be sold in bulk as raw materials by one manufacturer directly to another without the prepayment of specific tax. Stemmed leaf tobacco, fine-cut shorts, the refuse of fine-cut chewing tobacco, scraps, cuttings, clippings, and sweepings of leaf tobacco or partially manufactured tobacco or other refuse of tobacco may be transferred from one factory to another under an official L-7 invoice on which shall be entered the exact weight of the tobacco at the time of its removal, and entry shall be made in the L-7 register in the place provided on the page of removals. Corresponding debit entry will be made in the L-7 register book of the factory receiving the tobacco under the heading "Refuse, etc., received from other factory' showing the date of receipt, assessment and invoice numbers, name and address of the consignor, form in which received, the weight of the tobacco. This paragraph should not, however, be construed to permit the transfer of materials unsuitable for the manufacture of tobacco products from one factory to another." ( Emphasis supplied .) (e) Section 43(a) of Revenue Regulations No. 17-67, to wit: "Section 43. Tobacco exempted from specific tax . No specific tax shall be collected on the following: (a) Leaf tobacco and partially manufactured tobacco, except imported leaf tobacco, unless entered in the L-7 official register book. xxx xxx xxx In the Petition at bench, the deficiency taxes in question were being assessed by the Petitioner on its pose that, since the penultimate paragraph of Section 141 of the Tax Code did not expressly include " stemmed leaf tobacco " as among the tobacco products therein specifically excluded from the prepayment of the 75 centavos per kilogram tax when transferred or conveyed, Respondent's local purchases of stemmed leaf tobacco from January 1, 1986 to June 30, 1989 were subject to specific tax under the said section of the Tax Code. To justify its pose, the Petitioner cited Section 20(m)(1) of Revenue Regulations No. 17-67, which classified " stemmed leaf tobacco " as " partially manufactured tobacco " which was subject to specific tax under Section 141(b) of the Tax Code. In confutation, Respondent sought refuge under Section 137 of the Tax Code which specifically included " stemmed leaf tobacco " as among the tobacco products exempt from payment of the specific tax, but only " under such conditions as may be prescribed in the regulations of the Department of Finance ", and upon compliance with the following alternative conditions: (a) if the same are to be exported; or (b) if they are to be used in the manufacture of other tobacco products on which the excise tax will eventually be paid on the finished product. aAHISE Respondent intractably claimed that, notwithstanding the classification of stemmed leaf tobacco as partially manufactured tobacco under Section 20(m)(1) of Revenue Regulations No. 17-67, under Section 43 of the same Revenue Regulations, " partially manufacture tobacco " was specifically exempted from payment of the specific tax. By way of riposte of Respondent's preceding assertions, Petitioner asseverates that, assuming, arguendo , that Section 137 specifically exempts stemmed leaf tobacco from the payment of specific tax when sold in bulk as raw material by one manufacturer directly to another, the exemption can only have application when the sale is made by one L-7 directly to another, as outline under the second paragraph of Section 20(a) of Revenue Regulations No. V-39. Corollarily, since only the Respondent was an L-7 while its local suppliers or the transferors of the stemmed leaf tobacco were not, the questioned purchases were not exempt from specific tax. Thus, as ratiocinated by the Petitioner, "Thus, Sections 141 and 137 of the Tax Code must be read, considered and construed together in order to render both provisions operative rather than render one or the other nugatory. Under Section 141 of the Tax code, partially manufactured tobacco is subject to specific tax. Stemmed leaf tobacco being partially manufactured tobacco, it is, therefore, subject to specific tax. This is the general rule. Under Section 137 of the Tax Code, as implemented by Section 20(a) of Revenue Regulations No. V-39, stemmed leaf tobacco is exempt from specific tax when sold in bulk as raw material by one L-7 directly to another L-7. This is the exception." ( at pages 40-41, Rollo .) We are not in accord with Petitioner's assertions. We find and so declare that purchases stemmed leaf tobacco are exempt from specific tax. Thus, partially prepared tobacco , under which stemmed leaf tobacco has been classified by Section 2(m)(1) of Revenue Regulations No. 17-67, is subject to specific tax pursuant to Section 141(b) of the Tax Code. Section 137, however, which states, in part, that " stemmed leaf tobacco . . . may be sold in bulk as raw material by one manufacturer directly to another, without payment of the tax under such conditions as may be prescribed in the regulations of the Department of Finance (.)", provides the exception. It bears stressing that Sections 2(i) and (j) of Revenue Regulations No. 17-67 define " manufacturer of tobacco " and " manufacturer of cigars and/or cigarettes " as two different categories of manufacturers, to wit: "Section 2. Definition of terms . xxx xxx xxx (i) "Manufacturer of tobacco" Includes every person whose business it is to manufacture tobacco or snuff or who employs others to manufacture tobacco or snuff, whether such manufacture be by cutting, pressing (not bailing), grinding, or rubbing (grating) any raw or leaf tobacco, or otherwise preparing raw or leaf tobacco, or manufactured or partially manufactured tobacco and snuff, or putting up for consumption scraps, refuse, or stems or tobacco resulting from any process of handling tobacco stems, scraps, clippings, or waste or sitting, twisting, screening or by any other process. (j) "Manufacturer of cigars and/or cigarettes" Includes those persons whose business it is to make or manufacture cigars and/or cigarettes for sale or who employ others to make or manufacture cigars and/or cigarettes for sale; but the term does not include artisans or apprentices employed to make cigars and/or cigarettes from material supplied by the employer, the latter being lawfully engaged in the manufacture of cigars and/or cigarettes." Since Section 137 uses only the term " manufacturer " unqualifiedly, it must be taken to mean as encompassing within its terms both " manufacturers of tobacco " and " manufacturers of cigars and/or cigarettes ." " Ubi lex non distinguit nec nos distinguere debemus. " When the law does not distinguish, we must not distinguish. Hence, "When a statute is clear, it must be taken to mean exactly what it says. Under settled principles of statutory construction, if a statute is clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. The verba legis or the plain meaning rule rests on the valid presumption that the words employed by the legislature in a statute correctly expresses its intent or will and preclude the court from construing it differently. The legislature is presumed to know the meaning of the words, to have words used advisedly, and to have expressed its intent by the use of such words as are found in the statute." ( Republic versus Court of Appeals, G . R . No . 103882, November 25, 1998, 299 SCRA 199, 270-271. ) Indeed, the obvious purpose of the exemption from prepayment of specific tax of the tobacco products sold in bulk, as raw materials, outlined in Section 137 and the penultimate paragraph of Section 141 of the Tax Code, is to avert a possible double taxation inasmuch as these articles will be utilized in the manufacture of finished tobacco products on which specific tax will eventually be paid. In the light of this intendment, and considering the intent of our legislators to grant all manufacturers, without qualification, exemption from the prepayment of excise tax in transactions involving the sale of stemmed leaf tobacco in bulk to be used as raw material for the manufacture of other tobacco products. We do not agree with Petitioner's assertion that stemmed leaf tobacco is exempt from prepayment of tax only when sold in bulk as raw material from one L-7 directly to another L-7. This is very explicit from the provisions of the second paragraph of Section 20(a) of Revenue Regulations No. V-39, the very same provision relied upon by the Petitioner for its assertion. Thus, the provision in the same regulation providing that "Stemmed leaf tobacco, . . . may be transferred from one factory to another under an official L-7 invoice . . . cannot be taken to mean as limiting or restricting the exemption only to L-7 permittees. Such an interpretation would be entirely incongruous with the unqualified exemption granted to all tobacco manufacturers in Section 137 of the Tax Code and affirmed in the first paragraph of Section 20(a) of Revenue Regulations No. V-39. To give vibrant meaning to the two aforecited provisions, the second paragraph of Section 20(a) should be interpreted as providing the conditions that must be complied with, but only if the seller of stemmed leaf tobacco happens to be an L-7 permittee. Moreover, We find untenable the contention of Petitioner that Section 43(a) of Revenue Regulations No. 17-67 pertains only to the exportation of partially manufactured tobacco and tobacco products. While it may be true that the title of Chapter XI of Revenue Regulations No. 17-67 covers " partially manufactured tobacco and tobacco products for export ," Section 43 thereof specifically refers to " tobacco exempted from specific tax ." And from a close dissection of Section 43(a), it can be resolutely inferred that all "partially manufactured tobacco," without distinction, is exempt from specific tax. This, and only this interpretation, can find harmony with Section 137 of the Tax Code and Section 20(a) of Revenue Regulations No. V-39. For it is a basic axiom of statutory construction that, " Interpretare et concordare legis legibus est optimus interpretandi ." To interpret and to harmonize laws with laws is the best method of interpretation. "It is a rule in statutory construction that every part of the statute must be interpreted with reference to the context, i.e., that every part of the statute must be considered together with the other parts, and kept subservient to the general intent of the whole enactment." ( Paras versus Commission on Elections , 264 SCRA 49 .) CaAcSE xxx xxx xxx "It is a cardinal rule in statutory construction that in interpreting the meaning and scope of a term used in the law, a careful review of the whole law involved, as well as the intendment of the law, must be made." ( Alpha Investigation and Security Agency, Inc . versus National Labor Relations Commission, 272 SCRA 653 ). Considering the clear and categorical language of Section 137 of the Tax Code and appurtenant provisions thereto, there is no room for the application of the rules on the construction of tax exemption statutes. Thus, "It is our duty in construing a law to determine legislative intention from its language. The history of events transpiring during the process of enacting a law, from its introduction in the legislature to its final validation has generally been the first extrinsic aid to which courts turn to construe an ambiguous act. We bear in mind, however, that extrinsic aids are resorted to only if the words of the statute are ambiguous. The clear, unambiguous and unequivocal language of a statute precludes any court from further construing it and gives it no discretion but to apply the law. When the statute is clear, it must be taken to mean exactly what it says." ( Republic versus Court of Appeals, supra. ) In view of the foregoing disquisition, and apropos to the seventh ground advanced by the Petitioner in its Petition, the determination of the owner or possessor, for purposes of applying the provisions of Section 127 of the Tax Code, becomes immaterial precisely because there is no need to pay the specific tax due as, by express statutory provision, the questioned purchases may be made without the prepayment of the specific tax. Moreover. as a corollary to all our foregoing disquisitions, Petitioner's assertion, that the government is not estopped from collecting legitimate taxes due to the mistake of its agents, loses lustre. This is on account of the fact that the BIR's practice of exempting the sale of stemmed leaf tobacco under the conditions herein discussed, since July 1939 when the original Tax Code was adopted until the latter part of 1989 was not the result of an erroneous application and enforcement of the law, as Petitioner avers. Rather, it was a position the BIR had deliberately and willfully adopted over the years in deference to the explicit mandate of the laws governing the subject. IN THE LIGHT OF ALL THE FOREGOING, the Petition is hereby DENIED. The Decision, dated August 31, 1995, of the Court of Tax Appeals in C.T.A. Case No. 4516 is hereby AFFIRMED IN TOTO . SO ORDERED. Reyes and * Villarama, Jr., JJ., concur. Footnotes * Vice J. Santiago, who had been promoted to the Supreme Court.